The slowdown in the growth of labor productivity is the nation's biggest economic problem and it has many implications.
First of all, under such conditions, broader economic growth will not be strong enough. Second, the real wages of workers will not improve significantly. Third, that the United States is becoming less competitive in world markets. Finally, U.S. leaders have a lot of work to do.
Let's frame the discussion in terms of the United States being competitive in world markets. The United States must produce goods and services that are of good quality when compared with what the rest of the world provides and must be able to produce these goods and services at a cost comparable to the competition. Furthermore, United States business must be a world leader in technology and innovation.
The United States is apparently having problems in these areas. Here's why.
Most economic models dealing with international financial relationships have little or nothing to do with labor productivity. In fact, the models usually make the assumption that labor productivity and economic growth will remain constant in any situation that is being examined.
For example, in the Economic Trilemma example, the emphasis is upon the foreign exchange rate and the independence of a country's economic policy, usually discussed in terms of monetary policy. When economists discuss an issue relating to the Trilemma situation, they assume that economic growth will not be disturbed.
The argument goes that if this is true, a nation can choose two of the following three options. They are to have a fixed exchange rate, to limit the control of capital internationally, and to have an independent economic policy.
During the time of the Bretton Woods system, nations chose to have a fixed exchange rate and the ability to conduct an economic policy independent of all other nations.
This system started to break down in the 1960s as capital began to flow freely among nations. The result was the breakdown of the Bretton Woods system in August 1971 and the floating of the U.S. dollar.
This has been the system that has existed internationally since 1973.
Yet, something has happened during this time. Economic growth has slowed considerably and this has been accompanied by the slowdown in the growth of labor productivity.What happened in the U.S. was an extended period of "inflation" whether you refer to it as monetary inflation or credit inflation, the fact is that inflation primarily dominated the whole period from the early 1960s until the 2010s.
I say this because the value of the U.S. dollar came under pressure in the 1960s so that President Richard Nixon had to float the U.S. dollar in August 1971. This was due to inflationary pressures, however, you want to call it.
Then, from January 1973, when the new international financial order was put into place, until July 2011, the value of the U.S. dollar fell by more than one-third, actually more than 36%, against all major trading currencies.
This is what inflation does to currencies and this is what happened to the United States as its governments, both Republican and Democratic, pursued fundamentally Keynesian economic stimulus policies, to achieve, hopefully, higher rates of economic growth and high levels of employment.
Unfortunately, the high rates of economic growth and high levels of employment were not achievable with these types of governmental economic policies. That is, given the credit inflation of these fifty-plus years, labor productivity could not keep up and neither could economic growth.
In the article cited in the first paragraph above I presented a couple of reasons why labor productivity was impacted. This brings us to the current situation.
The same old Keynesian policies are not going to turn around the growth of labor productivity. This has been tried, and it just doesn't work.
What the market place seems to want is for the Federal Reserve and the U.S. government to become more prudent in their monetary and fiscal affairs.
Now, financial markets seem to want the Federal Reserve to raise interest rates in order for the value of the dollar to rise.A strong dollar puts pressure on U.S. manufacturer's to improve productivity to maintain their competitive position internationally. But, this implies that the Federal Reserve and the federal government must conduct their monetary and fiscal policies in a disciplined manner, one that does not cause the value of the U.S. dollar to start falling again.
Furthermore, it puts pressure on the U.S. government to dismiss short-run policy efforts like deficit spending, and move to other programs of a longer-term nature that boost education, training, and the spread of information. It increases the pressure to develop programs that improve labor productivity.
This is a hard task, and it is one that will take time, something that politicians whose priority is to be re-elected have in short supply. But it is these longer-term programs that will increase labor productivity and get the economy moving faster.